The assurance companies and investors really need

The assurance given to the public and investors through audit reports by large audit firms has undoubtedly suffered severe damage.

In June, The Guardian reported that fines against accountants more than doubled to a record £32 million (more than R600 million) last year as the Financial Reporting Council cracked down on auditors. 

The number of corporate scandals and massive penalties inflicted on the large audit firms in recent times is increasingly leading to calls for a new way of thinking about the reassurance given through ‘audit opinions’.

Nicolaas van Wyk, CEO of the Southern African Institute for Business Accountants, says there has been a steady decline in the demand for audit services in South Africa over the years.

However, he is not convinced that companies have moved towards having their annual financial statements independently reviewed. The Companies Act allows a company to either have its financial statements audited or independently reviewed.

Most of the companies in SA are ‘owner-managed’ and have opted for compilation reports where a preparer organises the financial information in accordance with the necessary bookkeeping standards.

There is no review or in-depth investigation of the information provided by the business owner, explains Van Wyk.

Businesses cutting costs

Wiehann Olivier, a partner at Mazars, says in a statement that many companies have been trying to “better manage” their expenses given the current state of the local and global economy. Since audit fees make up a significant portion of those expenses they have been focusing specifically on audit fees.

Read: Businesses need to get serious about financial managers

In terms of the act, certain companies have no choice in whether to choose an audit or not. If they have a ‘public interest score’ of more than 350 then the financial statements will need to be audited.

Olivier explains that the score is based on factors such as the number of individuals with beneficial interests (shareholders), turnover for the financial year, third party liability at the end of the financial year and the average number of employees.

Independent reviews

Independent reviews are available to companies with a public interest score of less than 350. If the financial statements have been compiled independently the company can opt for an independent review as opposed to an audit, says Olivier.

An independent review primarily consists of making inquiries of management and others within the company, applying analytical procedures, and evaluating the evidence obtained.

“An audit is a much more in-depth investigation where various techniques are used to obtain the assurance required to enable the auditor to issue an audit opinion,” says Olivier.

Van Wyk observes that given the growing list of corporate scandals, not only in SA, it does appear as if the current “assurance reports” given to investors and shareholders are pretty much futile.

However, in most instances, financial institutions will still insist on audited financial statements when considering financing a company. “They still believe it does something,” says Van Wyk.

He asks if financial institutions or lenders should not rather be focusing on the areas where they run the biggest risk – for example the overvaluation of assets – when making a decision, rather than relying on audited financial statements.

“I believe the world has moved beyond the knee-jerk reaction of having audited statements in order to avoid risks or scandals. We need unique reports for unique problems.”

Technological developments, and specifically the role of artificial intelligence (AI), demand a reinvention of the profession, he says.

The latest trends are in-time audits using AI and more specific risk-driven investigations. An audit is fast becoming a “run of the mill” operation because of AI and the role of robots.

The current acts and the assurance reports that form part of the corporate landscape is becoming outdated in the face of increased automation.

Time for unification?

“It is time for a unification of the audit profession with comprehensive legislation in order for all to incorporate the new way of thinking and the use of technology to approach the market,” says Van Wyk.

Auditors and accountants should understand that they are merely spokes in the wheel of the economy, and not the drivers of the economy.

They should understand what the intent of the business owners is – do they want to grow the business and sell it, or do they want to continue making a living for themselves and their staff?

That understanding, says Van Wyk, will drive the decision as to whether there is a need for an audit, an independent review, or simply a financial statement preparer supported by an internal auditor to ensure that proper controls are in place.